L Brands, Hertz trade down; HCA, BMC Software trade above par; funds add $344 million

By Paul A. Harris and Abigail W. Adams

Portland, Me., Aug. 23 – The high-yield primary market remained dormant on Thursday with all eyes on September for an anticipated sizable pipeline of deals.

With no new deal activity, the secondary space was “dead,” a market source said. Trading volume remained light with few notable movers in the space.

L Brands Inc.’s junk bonds were trading down on Thursday after the company slashed its forward guidance and reported sagging sales for one of its brands.

Hertz Corp.’s junk bonds also saw some selling pressure on Thursday after a Morgan Stanley equity report about the company’s stock.

While the company’s 7 5/8% senior notes due 2022 dropped about 1 point, they are expected to return to their previous levels.

The situation is similar to CenturyLink, Inc.’s 7½% senior notes due 2024, which dropped on Wednesday after an analyst downgrade of the company’s stock.

Those notes returned to their previous level on Thursday, a market source said.

Two recent deals that initially lagged their issue price after breaking for trade in early August have improved in recent days.

HCA Inc.’s newly priced two tranche offering of senior bullet notes (Ba2/BB-) and BMC Software’s 9¾% senior notes due 2026 (Caa2/CCC+) are now trading at or above par.

Meanwhile, high-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall liquidity trends in the junk market – continued their streak of inflows for the week ended Aug. 22, adding $344 million, according to fund-flow statistics generated by AMG Data Services Inc.

Quiet primary

The major currency high yield primary market was quiet on Thursday and is expected to remain so until at least Sept. 4, when the extended Labor Day holiday weekend concludes, sources say.

At that point the new issue market is expected to pick up substantially as it begins working through a sizable pipeline of transactions to fund mergers and acquisitions as well as opportunistic refinancing deals.

Early estimates have total September issuance running at $20 billion to $25 billion, depending on market conditions.

L Brands drops

L Brands’ junk bonds were dropping on Thursday after the fashion retailer released its second-quarter earnings report and again slashed its forward guidance.

L Brands’ 5¼% senior notes due 2028 were down about 2½ points. They were seen at 87½ bid, 88½ offered after closing on Wednesday at 90 bid, 91 offered, a market source said.

L Brands’ 5 5/8% notes due 2022 were down 1 point to 102¼.

While the company reported a second-quarters earnings beat, it lowered its forward guidance and reported sagging sales of its Pink brand, a sister to its Victoria Secret brand.

“They knocked down their third quarter guidance pretty significantly,” a market source said.

L Brands reported earnings per share of 36 cents for the second quarter versus analyst expectations for earnings per share of 34 cents.

However, earnings per share for the third quarter are now expected to be 0 to 5 cents.

Full year earnings per share are now expected to be $2.45 to $2.70. Its previous forecast was $2.70 to $3, which it revised in May from $2.95 to $3.25.

The company also reported sagging sales of its Pink brand.

L Brands junk bonds were also under pressure in mid-July after the company reported sales at its Victoria Secret stores slumped 1% in June.

The 5¼% bonds traded down about 1 point to 88¾ in July but recovered.

Hertz under pressure

Hertz’s junk bonds were trading down on Thursday after Morgan Stanley released a report on the company’s equity.

There was some selling pressure on the bonds as the rental car company’s stock “got creamed,” a market source said.

Hertz’s 7 5/8% notes due 2022 were down about 1 point. They were seen at 98¾ bid, 99¼ offered on Thursday after trading the previous day at 99¾ bid, par ¼ offered.

Hertz’s 5½% notes due 2024 were also down 1 point to 83¾.

While there was pressure on the notes on Thursday, they are expected to return to their previous levels, a market source said.

CenturyLink’s 7½% senior notes due 2024 were similarly under pressure on Wednesday after an analyst downgrade of the company’s stock.

While the notes were down ½ point on Wednesday, they returned to their previous level.

The notes were seen at 107 bid, 107½ offered on Thursday. “That’s basically where they were” before the downgrade, a market source said.

HCA breaks par

While HCA’s $2 billion two-tranche offering lagged their issue price after breaking for trade on Aug. 9, both tranches have now solidified at par.

HCA’s 5 3/8% notes due 2026 were up slightly to trade between par 3/8 and par ½ on Thursday, according to Trace data.

HCA’s 5 5/8% senior notes due 2028 were also up slightly to trade between par 1/8 to par ½ on Thursday.

The notes have largely lagged their issue price in secondary trading with most trades between 99¾ and 99 7/8 since the notes priced.

However, over the last two sessions, the notes have solidified above par.

HCA priced $2 billion in two-tranches on Aug. 9 at par, which included a $1 billion tranche of the 5 3/8% notes and a $1 billion tranche of the 5 5/8% notes.

BMC improves

BMC Software’s 9¾% senior notes due 2026 continued to improve on Thursday after solidifying above par earlier in the week.

The 9¾% notes were seen trading between par ½ and par ¾ on Thursday. The notes were seen at par bid, par ½ offered earlier in the week.

While the notes also broke par on Aug. 14, they have largely traded below par since pricing.

BMC priced two tranches of eight-year senior notes at par on Aug. 9 in a dual-currency $1.82 billion equivalent deal, which included a $1.475 billion tranche of the 9¾% notes.

The LBO financing deal brought to market for private equity firm KKR’s buyout of BMC is being looked to as the market awaits Envision Healthcare Corp.’s anticipated $2.15 billion offering, also a LBO deal brought to market to help fund KKR’s buyout of the company.

Wednesday outflows

Daily cash flows for dedicated high-yield bond funds were negative on Wednesday, the most recent session for which data was available, an investor said.

High-yield ETFs sustained $78 million of outflows on the day.

Actively managed high-yield funds saw $45 million of outflows on Wednesday, the source added.

Despite Wednesday’s outflows, high-yield mutual funds and exchange-traded funds saw $344 million of inflows on the week ended Aug. 22, according to AMG Data Services’ fund flow report.

The week marks the fourth consecutive week of inflows, turning the tide on a choppy year that has seen outflows reach record levels.

For the past 10 weeks, the funds have seen six inflows and four outflows.

The cumulative outflow for the year now totals about $17.849 billion, according to a Prospect News analysis of the reports by the Arcata, Calif.-based unit of Thomson Reuters Corp’s Lipper analytics division.

Indexes mixed

Three benchmarks for the high-yield secondary market were mixed on Thursday after all posted gains on Wednesday.

The KDP High Yield Daily index was down 5 basis points on Thursday, closing the day at 70.44 with the yield 5.81%.

Thursday marked the index’s first losses of the week and wiped out Wednesday’s gains when the index was up 5 bps. The index was also up 5 bps on Tuesday and 2 bps on Monday.

The Merrill Lynch High Yield index continued to see gains on Thursday.

The index was up 2.7 bps with the year-to-date return now 1.815%. The index was up 10 bps on Wednesday, 9 bps on Tuesday and 10 bps on Monday.

The CDX High Yield 30 index dropped 7 bps to close Thursday at 106.88.

Thursday also marked the index’s first loss of the week. The index was up 5 bps on Wednesday, 18 bps on Tuesday and was flat on Monday.

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